notional amount or zero.
(b) It may only have an option to acquire the assets, on similar bases to (a), but it also
has a right to put in place other arrangements, e.g. granting the operator a new term
or selecting a new party to take on the assets. Payment might be made by the
grantor or by the new operator but always at the direction of the grantor.
(c) The grantor has an option to acquire the assets but if this is not exercised then the
operator may retain them.
The implications of grantor options and control of the residual interest have been
discussed at 3.2 above.
If the terminal arrangements fall within (a) above the operator will have an
unconditional contractual right to cash. It will recognise a financial asset, initially at fair
value, which will then be accounted for according to the relevant classification under
IFRS 9 (see 4.2 above). If the financial asset measured at amortised cost or fair value
through other comprehensive income under IFRS 9, then interest will be calculated
using the effective interest method. At the end of the contract the financial asset in
respect of the residual interest will be stated at the operator’s best estimate of the
amount receivable.
Where the grantor has a right to put in place other arrangements, as in (b) above, the
operator would only have an unconditional right to cash (i.e. a financial asset) after the
grantor terminates the operator’s involvement in the concession (by letting the contract
lapse or by selecting a new party to take on the assets) if such termination will result in
a payment to the operator. To the extent that the grantor can avoid any obligation to
pay cash by allowing the concession term to continue, the operator has an intangible
asset. The existence of such extension rights would have to be taken into account when
determining the term of the concession arrangement.
Service concession arrangements 1837
If the arrangement is of the type described in (c), then the operator’s residual interest is
not a financial asset. Nor does it have a residual interest in the underlying property, plant
and equipment because this is an arrangement within scope of IFRIC 12 and the entity
cannot recognise the underlying assets, in whole or in part. [IFRIC 12.11]. The only option
is to recognise an intangible right to receive cash or the residual interest in the assets.
By contrast to the residual financial asset, it is most unlikely that the operator would be
able to restate the value of this right over the term to its best estimate of the amount
receivable at the end of the contract. IAS 38 only allows intangible assets to be revalued
in very restricted circumstances; see Chapter 17 at 8.2.
The operator will have to account for its residual interests as described above based on
the contractual rights, whatever model is being applied to its construction services. This
is similar to the explicit requirements for upgrade services described at 5.1 below:
IFRIC 12 recognises that upgrade services have to be recognised as revenue on the basis
of their individual contract terms regardless of the model applied. [IFRIC 12.14]. The result
is that an entity that has recognised an intangible asset for the major part of its
construction services might have to recognise a financial asset for the residual interests
– or vice versa if its construction services have been accounted for as a financial asset.
This treatment is a variation of the bifurcation described at 4.5 above except that the
financial asset relates only to the residual interest in the infrastructure rather than to a
portion of the consideration receivable for the infrastructure as a whole. The residual
rights will be taken into account in calculating the revenue receivable under the
contract, which are described at 4.2 and 4.3 above.
As the termination arrangements can be complex, care will have to be taken to ensure
that the effects are fully analysed.
Example 26.8: Contractual rights to cash in termination arrangements
The facts of the SCA are as in Example 26.1 above. At the end of the term, the grantor will either pay for the
infrastructure assets at their net book value, determined on the basis of the contract, or it may decide to grant
a new SCA on the basis of a competitive tender, which will exclude the current operator. If the grantor elects
to do the latter, the operator will be entitled to the lower of the following two amounts:
(a) the net book value of the infrastructure, determined on the basis of the contract; and
(b) the proceeds of a new competitive bidding process to acquire a new contract.
Although the operator cannot enter the competitive tender, it also has the right to enter into a new concession
term but in order to do so, it must match the best tender offer made. It has to pay to the grantor the excess of
the best offer (b) above the amount in (a); should the tender offer be lower than (a), it will receive an
equivalent refund.
In this arrangement, the operator has a contractual right to cash that should be
recognised as a financial asset. It has a right to receive the lower of (a) and (b). It may
choose to use its right to cash to settle part or all of the price of a new concession
agreement but this does not affect the fact that it has a right to cash. This example also
illustrates that calculating the fair value of the contractual right to cash may be complex
as it has to take account of a number of different estimates, including the net book value
of the infrastructure at the end of the contract, as well as the options available to the
parties to the contract.
1838 Chapter 26
4.7
Accounting for contractual payments to be made by an operator
to a grantor
Many arrangements require an entity to make payments to the grantor during the course
of the SCA. These payments take two main forms:
(a) payments related to the use of tangible assets, including:
(i) payments to the grantor or third parties for making assets available (such
as trains and buses) in order to provide the services required by the
concession contract;
(ii) payments to a third party for the construction and making available of assets
(such as rolling stock) that pass to the grantor at the end of the concession
term; and
(iii) payments to the grantor for making available land on which the infrastructure
assets are constructed or situated; or
(b) fees payable to the grantor for the right to operate the concession, which can be
described as concession fees, development fees or access charges.
It is possible that some of these payments could be for the right to use assets controlled
by the operator itself or the concession payment could relate to a distinct good or
service that is separate from the concession arrangement. In July 2016, the
Interpretations Committee observed:
(a) if payments made by an operator to a grantor are for a right to a good or
service that is separate from the service concession arrangement, the
operator should account for those payments by applying the applicable IFRS
Standards; and
(b) if payments are for the right to use an asset that is separate from the infrastructure
within the scope of IFRIC 12, the operator shou
ld assess whether the arrangement
contains a lease. If the arrangement contains a lease, the operator should account
for those payments by applying IFRS 16.11
The Interpretations Committee observed that if payments made by an operator to a
grantor are not for the right to a separate good or service or a right to use an asset
that is a lease, the accounting for those payments should depend on whether the
SCA falls within the financial asset model, the intangible asset model or is a hybrid.
This means that the payments will be reflected in the carrying value of the
appropriate concession asset:
• if the SCA is accounted for under the financial asset model, then the concession
payment is an adjustment to the transaction price, applying the requirements in
paragraphs 70-72 of IFRS 15, illustrated at 4.7.2 below;
• if the intangible asset model applies, then the concession payment is part of the
cost of acquiring the intangible asset recognised for the right to charge users of the
service, illustrated at 4.7.3 below; and
• if the operator has both a right to charge users of the public service and a
contractual right to receive cash from the grantor, then the entity should assess
the extent to which the concession payment represents an adjustment to the
overall consideration receivable or whether it is consideration for the
Service concession arrangements 1839
intangible asset element.12 This is determined by comparing the amount of the
contractual right to receive cash from the grantor with the fair value of the
operator’s services.
The recommended treatment under the financial asset model is predicated on the
fact that the operator has a contractual right to receive cash from the grantor and
that payments between the parties are all part of this single relationship, however
described. In this regard, payments to the grantor will include amounts paid to a
related private sector entity to which responsibility for the service has been
devolved. [IFRIC 12.3].
Under the Interpretations Committee’s approach for the intangible asset model,
payments to the grantor that are not for a right to a good or service that is separate from
the SCA, and are not an embedded lease, represent consideration for the concession,
i.e. part of the cost of the intangible asset recognised. It is clearly a requirement of IAS 38
that an intangible asset be recognised when it meets the definition and other recognition
criteria (see Chapter 17 at 2 and 3) and it must be recognised at its present value if
payment is deferred. [IAS 38.32].
Therefore, fixed fees payable over the life of a concession generate an intangible asset
and give rise to a financial liability on inception, as the fixed fee will only be avoided by
the operator if it withdraws from the concession, which in most circumstances is
contractually and economically unfeasible.
4.7.1
Accounting for variable payments in a service concession
Some contracted payments, particularly concession fees, vary with a measure of usage
of the concession asset or with another feature of the arrangement. Whilst the
Interpretations Committee was able to reach a consensus on the treatment of
concession fees that do not depend on future activity, as noted at 4.7 above, it has found
the issue of variable payments more challenging.
In July 2013, the Committee tentatively agreed that, in cases where the variable
payments do not depend on the purchaser’s future activity, the fair value of those
variable payments should be recognised as a liability and included as appropriate in the
measurement of the related asset. The Committee was unable to reach a consensus on
the treatment of payments that vary in relation to future activity and on the question of
whether subsequent changes to the estimate of contingent consideration should be
capitalised or expensed.13 In March 2016, the Committee determined that the issue of
variable payments for asset purchases is too broad for it to address within the confines
of existing IFRS standards, and consequently decided not to add the issue to its agenda.14
The Committee’s deliberations on the treatment of variable payments for the separate
acquisition of PP&E and intangible assets are also discussed in Chapter 17 at 4.5 and
Chapter 18 at 4.1.9. At present, the usual treatment for an operator in a service
concession is to treat contingent payments that vary in relation to future activity as
executory and expense them as incurred.
4.7.2
Accounting for contractual payments under the financial asset model
If the financial asset model applies then the Interpretations Committee agreed that
unless the contractual payments relate to the right to use assets controlled by the
1840 Chapter 26
operator itself or relate to a distinct good or service that is distinct from the service
concession arrangement, the contractual payment is accounted for as a reduction in the
overall consideration received, i.e. it is an adjustment to the fair value of the
consideration given by the grantor15 (see 4.7 above). Another way of expressing this is
that payments from the grantor reduce the financial asset while payments to the grantor
increase that asset; both will also affect the amount of interest accrued on the
outstanding balance. This applies whether the payment is for the right of access to an
asset or described as a concession fee.
Example 26.9: Contractual payments made to a grantor under the financial
asset model
Entity A enters into a 10 year concession agreement requiring it to construct a school and be responsible for
operations services (including maintenance, utilities, cleaning and catering). After a 2 year construction
period, the entity will receive €300 per year during years 3-10, to operate the asset, after which the concession
will cease. The entity must pay €30 per year for the use of the land on which the school is built. Entity A
concludes that the land use charge does not relate to a distinct good or service that is distinct from the service
concession itself.
The entity’s estimated contract costs and contractual payments are as follows:
Annual charge
Total
Year
€ €
Construction services
1-2
500
1,000
Operation services
3-10
100
800
Land use charge
1-10
30
300
Total cash paid
1-10
2,100
The operating cash flows under the contract are as follows:
Year
1 2 3 4 5 6 7 8 9 10
€ € € € € € € € € €
Concession
consideration
–
– 300 300 300 300 300 300 300 300
Construction
and operation
costs
(500) (500) (100) (100) (100) (100) (100) (100) (100) (100)
Land use
charge
(30) (30) (30) (30) (30) (30) (30) (30) (30) (30)
Net cash flow
(530)
(530) 170 170 170 170 170 170 170 170
The entity recognises revenue in accordance with
IFRS 15 and estimates that the stand-alone selling price of
its services and total revenue from those services is as follows:
Estimated stand-alone selling price
Total
€
Construction
Forecast cost
+
5%
1,050
Operation and maintenance
" "
+
15%
920
Total revenue
1,970
Lending rate to grantor
2.25% per year
Under the financial asset model, the land use charge is treated as an adjustment to the transaction price and is
not treated as an expense. Accordingly, the gross concession profit is calculated as follows:
Service concession arrangements 1841
Year
1 2 3 4 5 6 7 8 9
10 Total
€ € € € € € € € € €
€
Concession
revenue*
525 525 115 115 115 115 115 115 115 115 1,970
Construction
costs
(500) (500) (100) (100) (100) (100) (100) (100) (100) (100) (1,800)
Finance
income
6 19 24 21 18 15 12 8 5 3 130
Concession
profit**
31 44 39 36 33 30 27 23 20 18 300
* Concession revenue comprises revenue from construction and operation and maintenance services
** Concession profit totals €300, which represents the total consideration received for services (€2,400) less
the total costs including the land use charge of €2,100. In the income statement this is analysed as:
€
Concession revenue
1,970
Construction costs
(1,800)
Finance income
130
Total
300
The contract asset / financial asset is computed as follows, applying an effective interest rate of 2.25%.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 362
